Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

A Critique of Monetarist and Keynesian Theories 515processes is painfully absent. 6 It is surprising that a theorysuch as the one Clark defends has nevertheless become themost widely accepted in economics up to the present day andappears in most introductory textbooks. Indeed nearly all ofthese books begin with an explanation of the “circular flow ofincome,” 7 which describes the interdependence of production,consumption and exchanges between the different economicagents (households, firms, etc.). Such explanationscompletely overlook the role of time in the development ofeconomic events. In other words, this model relies on the6 Perhaps the theorist who has most brilliantly criticized the differentattempts at offering a functional explanation of price theory through staticmodels of equilibrium (general or partial) has been Hans Mayer in his article,“Der Erkenntniswert der funktionellen Preistheorien,” published inDie Wirtschaftstheorie der Gegenwart (Vienna: Verlag von Julius Springer,1932), vol. 2, pp. 147–239b. This article was translated into English at therequest of Israel M. Kirzner and published with the title, “The CognitiveValue of Functional Theories of Price: Critical and Positive InvestigationsConcerning the Price Problem,” chapter 16 of Classics in Austrian Economics:A Sampling in the History of a Tradition, vol. 2: The InterWar Period (London:William Pickering, 1994), pp. 55–168. Hans Mayer concludes:In essence, there is an immanent, more or less disguised, fictionat the heart of mathematical equilibrium theories: that is,they bind together, in simultaneous equations, non-simultaneousmagnitudes operative in genetic-causal sequence as if these existedtogether at the same time. A state of affairs is synchronized in the“static” approach, whereas in reality we are dealing with aprocess. But one simply cannot consider a generative process“statically” as a state of rest, without eliminating precisely thatwhich makes it what it is. (Mayer, p. 92 in the English edition;italics in original)Mayer later revised and expanded his paper substantially at the requestof Gustavo del Vecchio: Hans Mayer, “Il concetto di equilibrio nella teoriaeconomica,” in Economía Pura, Gustavo del Vecchio, ed., Nuova Collanadi Economisti Stranieri e Italiani (Turin: Unione Tipografico-EditriceTorinese, 1937), pp. 645–799.7 A standard presentation of the “circular flow of income” model and itstraditional flow chart appears, for example, in Paul A. Samuelson andWilliam D. Nordhaus, Economics. According to Mark Skousen the inventorof the circular-flow diagram (under the name of “wheel of wealth”)was precisely Frank H. Knight. See Skousen, Vienna and Chicago: Friendsor Foes (Washington, D.C.: Capital Press, 2005), p. 65. Remember alsochapter 4, footnotes 36, 39, and 58.